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Edited Transcript of ARG.NZ earnings conference call or presentation 19-May-20 10:00pm GMT

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Full Year 2020 Argosy Property Ltd Earnings Call Auckland Jul 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Argosy Property Ltd earnings conference call or presentation Tuesday, May 19, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Fraser Argosy Property Limited - CFO * Peter Mence Argosy Property Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * Adam Lilley Craigs Investment Partners Limited, Research Division - Research Analyst * Arie Dekker Jarden Limited, Research Division - Head of Research * Jeremy Kincaid UBS Investment Bank, Research Division - Associate Analyst * Matthew Goodson Salt Funds Management Limited - MD & Portfolio Manager * Nick Mar Macquarie Research - Analyst * Rohan Koreman-Smit Forsyth Barr Group Ltd., Research Division - Research Analyst * Shane Solly Harbour Asset Management Limited - Director & Portfolio Manager ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Argosy Property Limited FY '20 Annual Results and Webcast. (Operator Instructions) I would now like to hand the conference over to Mr. Peter Mence, CEO. Please go ahead. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [2] -------------------------------------------------------------------------------- Good morning, and thanks for joining us. Unusual times, of course, but we'll go through a pretty much standard agenda with Dave and I doing the dog and pony act as it were, cover off the COVID-19 in terms of an update there, go through some highlights, strategy, comment on the portfolio, get Dave take us through the financials, talk a bit about some leasing update. And then together, we'll share our focus and outlook and then move into any questions. Okay. Turning firstly to COVID-19, and starting with where the business is at. Our continuity plan was based on working from home. And that was what we did. It was very successful. And obviously, we got the results out on time. But equally, the property team managed to deal with all the tenant issues, and of course, there were a lot of those and even managed to get some deals running through as we work through that. Working with the tenants to find their short-term solutions, provide reassurance and answers, providing some relief and some assistance with rental abatements, discounts, lease extensions for the months of April and May and pushing through into June as well. So we moved fairly quickly, got in touch with the tenants very early, had plans in place reasonably early with them and adjusted that as things changed on the way through. So it's a bit of a relief really that the government didn't interfere because by the time they were talking about coming up with a code of conduct, we'd already done deals with all the tenants, and we already had plans in place. It was only going to mean that we probably have gone backwards, and certainly, that we've had to redo everything that we'd already done. Construction activity. A couple of things there. Obviously, we had to stop with construction activity, along with the rest of the market. And there will be time delays as a result of that. There will be some increased costs, albeit most of the projects we've got are reasonably well contained. But with the timing issues held up, obviously, by the lockdown, also by the distancing requirements, and finally, by ability to get the required materials on site, so some of those we're still working through. We do expect a delay of 2 to 3 months -- sorry, 3 to 4 months with those projects. Obviously, health and safety was a bigger issue on site. It's all very well to have additional distancing, but it means that you don't necessarily have all the people able to make sure that the projects are proceeding safely. So there's time delays as a result of that. We'll be moving through the AGM in a hybrid. We expect at this point, if there was any difficulty, that makes it very easy to go to a full online one. But at this point, we're assuming no further lockdown. So looking at what are we seeing going ahead and what does the world without international travel look like. Economic environment, obviously, we're expecting a recession, of course. Interestingly, a lot of the tenants, since lockdown, are a lot more positive than they had been beforehand. Even some of the retail guys tell us that they're now bouncing back quite quickly and trading at levels in excess of their average month. So it will be interesting to see exactly where all that goes. But clearly, we expect the most impact in the retail sector and convenient for us that we've reduced that weighting and write-down. Politics. All [pushing hit] pretty much as standard. Don't expect to see the election delay. And I imagine that Mr. Bridges will be having an interesting Tuesday. Regulatory environment. Obviously, depreciation is a positive for us. OCR is a positive for us. And other government initiatives probably work for us going ahead. So for us, the business was reasonably well prepared. We went into the lockdown with very low rental arrears with good occupancy. And so we're starting from a good base. Positive regulatory environment and stimulation for the economy probably helps us in the short term, and we're probably all guessing what the long term looks like. But at this stage, we're expecting a relatively flat year, and hopefully, not too many tenant failures. Nice side of the Snickel Lane here. Moving through to the highlights. Obviously, net distributable income over the year was a reasonable increase at 3.8%, annualized rental increases at 2.7%. The second successful green bond, very pleased to see that go through, and 6.5% increase in the revaluation. Now obviously, that was loaded towards the front end of the year with the back end of the year, the second half, being largely flat. Retail down and Industrial driving up. So I think that's probably fairly typical across the market. And the full year dividend ended up with an increase over the prior year of 1.2%. So reasonably positive there. The strategy portfolio slide. There is no change to that from what you've seen last time. We've just continued working through that, and that's given us some reasonably good results. So successfully transitioned value-add properties into income earning. 180 Hutt Road, largely complete and earning income. 107 Carlton Gore Road, complete, green and earning us income for housing. We do have continued organic growth with development coming through, albeit that's likely to be pushed out a little bit, and we are not expecting to be pushing big projects ahead over the next 12 months. Fairly solid leasing outcomes during the year, finishing with only 1.2% vacancy. Working with tenants and appreciating that many of their situations will have changed, and particularly with commercial offices where we've got those offsetting trends towards working from home and people requiring less space. But the flip side of that is activity-based working with shared desking, most of the inquiry at the moment suggests that that's definitely on hold for the next 2 years. So you've got that -- the 2 offsetting trends are requiring more space and less space. There's about 15,000 square meters available of office space in Auckland, available for subleasing at the moment. The subleasing demand -- or the leasing demand seems to be matching that at this stage, but it's too early to be positive or negative on that. Continuing to move towards the full leasing at 7 Waterloo Quay. So obviously, 82% leased, good leasings to the Crown there and negotiating with the Crown over the remainder of the building. Second successful green bond we've mentioned and moving towards that AFFO-based dividend policy over the medium term. Acquisitions. The very small property at Jamaica Drive and the large industrial at 224 Neilson Street. We're not really anticipating any further acquisitions at this point until we find out what's happening with the rest of the market. The 244 Puhinui Road, expansion of our existing site with existing tenant down there that got locked away. And we did move out of the Whangarei property in Kioreroa Road. We also sold the Albany Lifestyle Centre and then failed to settle. That's disappointing. But we do have interest at the moment in the property, and we anticipate putting that through a campaign once the market settles in a couple of months' time. So the portfolio highlights. 98.8% occupancy, weighted average lease term still over 6 years, fairly heavy weighting to the industrial portfolio and heavy weighting into the Auckland market. We mentioned the annualized increase in rents at 2.7% and the revaluation gain, pleasing to see holding on to the valuation through the second part of the year. The valuers were obviously quite concerned and had 2 cuts at it, just to make sure that they had all those rental discounts and bits and pieces sorted. The demand for investments in the current market is still there, and the agents are telling us that they have, if anything, increased demand from offshore for New Zealand property. The chart showing the portfolio at a glance. I think that's pretty much as read and as expected. The large-format retail, we pushed the Albany Lifestyle Centre back into that bundle now but we're sitting pretty close to advance. The sector summary. I won't go through that in any particular detail other than to comment that the industrial demand is still reasonably strong. We've had some short-term demand. We see retail sector getting to industrial in terms of dark stores and in terms of assembly for online delivery. There have been a couple of fairly solid leases go through in the last little while. We did do a lease to Zealand Post at Springs Road for a short term through there, where got an inquiry at 8:00 in the morning, and it was signed by 3:00 in the afternoon. So there is some activity happening through there with retail getting through to industrial. In the office space, there's still quite a bit of inquiry in the market. Some of that was from prior lockdown. But in general, you're seeing a wait and see, have a look at actual square meter range requirements once they have a better idea of what the business is going to look like. But those offsetting trends between an increase in space required because you've moved away from shared desking and a decrease as people are looking to work from home, and in many cases, of course, lower staff numbers. The retail stuff was very much a game depending on which tenants you were talking to. Obviously, anything that was an essential service did reasonably well. But in lockdown, most tenants unable to operate. But the bounce back appears to be reasonably strong. What I'm going to be interested to see is what the long-term turnover looks like for things like beds and furniture going ahead. Looking at the value-add slide. We retained quite a few value-add opportunities. But at the moment, $200 million or earnings of about 5.8%. So there's no big pusher. The big trend we've seen at the moment is tenants looking to remain in place. So we expect renewals to be higher than we've previously expected. We expect development levels to be lower as we all take a more conservative view. Our focus remains on transforming value-add assets into green developments as they come through and where we get those opportunities. Looking at the development pipeline. 107 Carlton Gore Road, that is complete. 180 Hutt Road is complete. 7 Waterloo Quay, we're nearing the end of that, just working with the tenants, getting them in place. Jamaica Drive, we expect to see a delay there of about 3 months but working with the tenant on achieving that. They're keen to get the space as soon as it's finished. 8-14 Willis Street, 360 Lambton Quay, do expect some delays sitting through there. And at the moment, we're projecting that runs through to August. There's not just the COVID-19 delays there. Our tenant, who was working through activity-based working, want to now have a recut on the way they're going to use the property. So there are delays in terms of them being able to tell us what they need out of the building. The green developments that we had proposed at 101 Carlton Gore Road and 105 Carlton Gore Road, both still on track but both are expected to be pushed out at least 12 months. There's an update slide on 8-14 Willis Street and 360 Lambton Quay. That project is back on-site and moving ahead. As I mentioned earlier, delay is not just related to the shutdown, related to the supply of building products and to Stat's requirements from the building. So there's still work to be done in putting that back and coming up with a new completion date. With the 7 Waterloo Quay update, the reinstatement works, as mentioned, largely complete, working through that. We've got some work still going on with that insurance claim and continuing to work with the insurers on that. It seems to us that we're looking for -- likely to see a bit more progress on that in the next 6 months. Through to revaluations. Steve has given you the data on where we saw the movements. But obviously, regionally, Auckland was the biggest contributor. And by sector, industrial was the biggest contributor. Through to COVID-19, of course, it was very useful to have a fair chunk of office in Wellington that was underwritten by the Crown. They did pay their rent on time. Large-format retail, very much based around -- for the future based around click and collect, how that works and making sure that you're supporting your online retail offering. So with those, we're working on the options to establish a click and collect base in that centers so that tenants can more readily participate with online retailing from the bricks and mortar. I turn it over to Dave to go through the financials. -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [3] -------------------------------------------------------------------------------- Thanks, Peter. So the first slide for me is the income reconciliation slide. Like-for-like rental growth was 2.4%. So we had some good results on rent reviews, and we've provided more detail in the appendix as usual. The annualized increases were fairly consistent across the sectors. Most reviews in the period were fixed, with annualized increase there of 3%. 7 Waterloo Quay was down on the last year, primarily due to the $2.9 million termination fee that we received last year. We had a full year from 11 Coliseum Drive in Albany and 133 Roscommon Road in Wiri as well as extra income from 3 acquisitions that we made during the year that Peter mentioned. Developments and divestments dragged a bit on the top line, and the main causes were the withdrawal of 8-14 Willis Street and 107 Carlton Gore Road for development and the sales of 31 El Prado Drive in Palmerston North and 7 Wagener Place in St Lukes last year. So the next slide, financial performance. Following on from the previous slide, net profit was down by $2.8 million from last year. So I'll note that $2.2 million of property expenses were reclassified under NZ IFRS 16 to interest expense and depreciation this year for the first time. So $2.1 million of that went to interest and $100,000 to depreciation expense. Admin expenses were up due to the increased depreciation I just mentioned, ground lease costs incurred by Argosy's attendant and staffing costs. And our management expense ratio was 61 basis points, which was down on the 66 basis points last year. Interest expense was down by $1.4 million from last year. We had higher average debt in the NZ IFRS 16 adjustment, but that was more than offset by lower rates and higher capitalized interest. We took a $3 million impairment on our held-for-sale asset. As Peter mentioned, that sale was canceled in April. Earnings per share was down to $0.144 per share from $0.162 per share last year. Now moving on to distributable income. So after adjusting for all of the usual items, gross distributable income was down on prior year by $1.9 million, and net distributable income was up by $2.2 million or 3.8%. So the key thing here is the tax line. The tax expense was lower due to higher capitalized interest; higher deductible capital expenditure, including a large deduction for disposal cost at Hutt Road as well as write-offs at 107 Carlton Gore Road and Willis Street, the write-off for tax on the roof at Ti Rakau Drive, depreciation of the Albany Lifestyle Centre, which didn't sell as planned, so we've got extra depreciation there; and also extra depreciation on acquisitions and completed developments as we close those out. And finally, we had some deductible bond costs as well. So there's a lot of deductions in the second half of the year, and that resulted in a relatively low tax rate to gross attributable income of 9% for the full year. So on a per share basis, net distributable income was $0.072 per share compared to $0.0694 per share last year. The next slide, investment properties. So excluding the right-of-use asset, which is the ground lease here at 39 Market Place, the value of our property portfolio increased by 12% over the year. We incurred capitalized costs of $104.7 million, the biggest expenditure incurred on the 7 Waterloo Quay and Willis Street projects. Most projects are either completed or will be completed in the first half of this year. The exception is the 8-14 Willis Street project, which we now expect to finish in the first half of FY '22. We acquired 3 industrial properties during the year, as Peter said, 54 Jamaica Drive for $3.5 million, 244 Puhinui Road for $12.4 million and 224 Neilson Street for $32 million. And we also sold the property in Whangarei during the year. The Albany Lifestyle Centre was moved to held-for-sale originally, but it's now back to the portfolio again as the sale was canceled. So the value of our investment properties, including the right-of-use asset of $41.8 million, is $1.9 billion at 31 March 2020. So just quickly on the next slide, the NTA slide. NTA increased to $1.30 per share from $1.22 per share last year, and that's largely on the back of the revaluation gain of $60 million this year. So next slide covers our gearing. At 31 March 2020, this was 38.8%, which is higher than last year but still within our target band of 30% to 40%. The bank covenant is 50%. So it was disappointing that the sale of the ALC, Albany Lifestyle Centre, didn't go through. And this would have dropped our gearing to a consistent level with last year at 36%. So as Peter said, our intention is to sell this asset and 3 others that were already budgeted for divestment, and this would move our gearing to the lower half of the target band. So other initiatives include switching on the DRP a bit earlier than we planned and moving out 2 projects in Carlton Gore Road. I should also note that we're getting to the point in of our insurance claim. And every $10 million we receive in insurance will drop our gearing by 0.5%. Going to the next slide. The weighted average duration of our debt facility is 3.6 years compared to 2.7 years last year. The duration was helped by the second $100 million green bond, which was issued in October last year. Subsequent to year-end, we increased our bank facility by $75 million with a new tranche which expires in May 2024. We now have $125 million of headroom over drawn down debt. Our weighted average interest rate was 3.95% at 31 March, which compares well with prior period. Our percentage of fixed rate borrowings is at 50%, which has been very helpful with base rate declining at present. I note that the 90-day BKBM rate is hovering around the 30 basis point mark at the moment. The last slide from me on dividends. The fourth quarter dividend will be $0.015875 per share, making a full year dividend of $0.0635 per share as guided previously. Based on our current projections, we expect the full year FY '21 dividend to also be $0.0635 per share, paid fully from net distributable income. As I mentioned earlier, we're switching on the DRP with a 3% discount effective from this dividend. So in summary, we feel this year was a good year for the company given the divestments that we had last year in development withdrawals. And we believe we're still firmly on track with our momentum towards an AFFO-based dividend policy in FY '22, '23. So I'll hand you back to Peter. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [4] -------------------------------------------------------------------------------- Thanks for that, Dave. As I mentioned, we've got quite a bit of leasing work done during the year, and some of those notable successes were we obviously had to get some leases away at 7 Waterloo Quay. We've got internal affairs for 9 years. Housing & Urban Development for 9.25 and housing in the form of Kainga Ora for 9.25. We did the Cardinal Logistics sites at Puhinui Road. Now we already had 2 sites with them there. We had -- we owned the vacant site next door, so we sold it to Cardinal, who does the development and then sold it back to us. We did that because we didn't see the profit and risk being appropriate to do that. Cardinal still wanted to do the development. So we simply bought it back at end value, and they carried the risk. But as part of that transaction, we extended the existing leases back to 15 years on the rest of the site as well. So you've now got 3 buildings, contiguous sites with 15-year leases. 56 Jamaica Drive, that's the development we're working on. But obviously, we got a new deal in place with Big Chill for 15 years. And that rental is determined as a percentage of the value of the end product. But at this stage, it remains on budget. The Albany Mega Centre, a new lease with an existing tenant, North Beach, for 10 years. And the renewal of the ground lease to BP at Wakefield Street in Wellington, which is one of the properties we have on the market at the moment. So fairly tidy result with leasing activity. The profile over the medium term, not looking too bad. The 5-year income average looking at around that 9%. Largest expiry over the next 5 years is General Distributors, Favona Road at Mangere. We are expecting to get an extension on that one. Key lease expiries that we're working on. 147 Lambton Quay, we're expecting an extension there. Gough Gough & Hammer at 960 Great South Road. We know that Gough will be going. We're in the final stages of leasing negotiations with a new party to take that property. It's an interesting property. When I first started at what was then Armstrong Jones, God knows how many years ago, that building was on the redevelopment list. That site was on the redevelopment list. We put a lease in place because the economics went right at the time. And every time the lease on that property has come towards an end, there's been some sort of upset or recession in the market. So we're negotiating a 10-year lease on that at the moment to our new tenant. And so the next recession, I'm prepared to suggest, will be in 10 years' time. Viridian Glass, 39 Randwick Road, we're working with Viridian on what their business is likely to look like for the next few years. And we're expecting a renewal of that lease and likewise with Homes Consulting here at 39 Market Place. So the large expiries over the next 6 months pretty well looked after in terms of their expectation at this point, just not locked away quite yet. Turning to comments on the sector. And I've already covered most of this off. But the industrial sector, we're still seeing reasonably strong net absorption. And the limited land supply is giving us rental growth. Vacancy remains quite low, and we're not expecting big impacts from the COVID-19 recession in the industrial sector. I've spoken about the office sector. So we are seeing some changes come through there and very much a move with those 2 counters about requiring more space around people and less space for fewer people. The Wellington market continues to show reasonably strong demand except, obviously, one of the things that we've seen with the government, in particular, was where Stat were looking to move into activity-based working and drop to a ratio of around 6 square meters per person and are seeing that as being inappropriate and wanting more space and more traditional desking. Large-format retailing. This is the area where we could see structural shift early from the results of COVID-19, how much of that move to online retailing will not go back. Certainly, it has exposed big gaps in click and collect and online retail in the market, and both couriers and click and collect facilities and centers were unable to cope anywhere near the demand that we've experienced. It's interesting, in particular, to look at what happened with supermarketing and count down moving to using some of the supermarkets effectively as warehouses to fill the click and collect orders. And there is potential for supermarkets to look at distributing directly from warehousing where you've got online retailing. So you could see some dark store type concepts coming through there, which will effectively be industrial users. And it may mean that we have fewer very large supermarkets and more smaller supermarkets. So we could easily see some structural shift moving on through there. We don't -- obviously don't have much retail. We'll have even less once we move the lifestyle center. But the focus here is where you've got those large-format retail offering to make sure that they're focused on supporting the online retailing. So looking at how click and collect base integral to shopping centers might work. So looking out ahead, I don't think we want to be too optimistic but neither do we need to be too pessimistic. We'll continue to work on bringing the portfolio as we move through the upgrades and redevelopments. We are expecting that some of those projects will be pushed out. We're expecting tenants, and indeed, we're already seeing evidence of tenants deciding to stay put as a result of uncertainty in the market and being unwilling to take on the cost of relocating. So some changes there, pushing those things out. Obviously, we have to manage our way carefully through, and there is no standard tenant. So the tenant response is being different right across the portfolio. Asset management went in early, as I mentioned, but had to tailor the response to the individual tenants. One of the toughest ones through that was sorting out those who were opportunists from those who really didn't need help. So we'll continue to work through the leasing at 7 Waterloo Quay, and obviously, we're moving continually towards the AFFO-based dividend policy in the future. We obviously have some developments that we're still in progress with, and most notably, that's 8-14 Willis Street. We will need some recut on programs, working with the tenant to make sure that we're actually delivering what they need, understanding that their needs have changed. We've got still quite good interest in assets that we wanted to divest. So the properties that are in the market currently, apart from the lifestyle center, the property that we have, the freehold on, that is ground leased to BP in Wellington at Wakefield Street and the Hutt Road development that we've just done for Placemakers in Wellington. At the moment, we're still seeing reasonably solid investor interest, and the real estate agents are still looking for stock. It's too early to say what impact the COVID-19 may have on the investment market. But at this stage, we're still seeing reasonably strong investment and trust. Okay. That's it for me. We can move through to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question today comes from Jeremy Kincaid with UBS. -------------------------------------------------------------------------------- Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [2] -------------------------------------------------------------------------------- My first question is just around rental abatements. So are you able to give some color on the degree of abatements or deferrals if that's more relevant by sector? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [3] -------------------------------------------------------------------------------- Yes. No problem, Jeremy. I'll give you a bit of information actually on that. Just on a cash basis up to yesterday, so excluding the Albany Lifestyle Centre, we've received 82% of the cash that we'd expected to receive to that point from tenants. That's rent and OpEx. And including the ALC, it's 78%. So if you remember from our release earlier, we had a number of $5 million to $8 million, and that was excluding the lifestyle center. So the lifestyle center effectively is a positive in terms of our income this year because we hadn't planned to have it. So if you're looking at numbers excluding the Albany Lifestyle Centre, that $2.8 million comes $2.4 million. And that's the number that you'd compare with the $5 million to $8 million. Remember, the $2.4 million is before tax, and $5 million to $8 million is after tax. So we're off to a really, really good start on this. Now in terms of by sector, this is including the Albany Lifestyle Centre, 49% were retail of that abatement, 21% office and 30% industrial. So quite surprising. There's quite a chunk of industrial tenants needing relief, 30%. Is that helpful? -------------------------------------------------------------------------------- Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [4] -------------------------------------------------------------------------------- Yes. Very helpful. And then when you are giving abatements or deferrals to tenants, are you managing to renegotiate more favorable contract terms such as longer WALT or something like that or higher rental growth in the future? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [5] -------------------------------------------------------------------------------- Yes. The -- I mean the order really is deferral first, lease extension with a rent free second and then a rent abatement third. So in those numbers for rent abatements, they exclude any lease extensions we've done. But we've only done a few, to be honest with you. So less than $100,000 for both months have been lease extensions. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [6] -------------------------------------------------------------------------------- Yes, Jeremy. Tenants remain focused on the fact that they don't know what their business is going to look like in 5 years' time. And of course, they never have put leases on the balance sheet. So they're reluctant to do that at this point as well. So that's why we haven't had as many lease extensions as you'd normally expect. -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [7] -------------------------------------------------------------------------------- I can give you a little bit more color on the allocation as well. So 95% of these rental abatements is including the lifestyle center in Albany, Auckland and the balance in Wellington and the rest of the country. So by far, the largest, not many at Auckland and Wellington, in fact, only 3%. And that's the benefit of having a large government tenant base. -------------------------------------------------------------------------------- Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [8] -------------------------------------------------------------------------------- Yes. Okay. And then just back to the insurance claim. Is the insurer giving any guidance on when they're expecting to reach a determination? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [9] -------------------------------------------------------------------------------- Yes. We're hoping to go to mediation next month on that. So we've done all the work. We're ready to go. So we're in the mediation phase now. So it is getting to the point in, I would say. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Your next question comes from Rohan Koreman-Smit with Forsyth Barr. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Just a couple of quick questions. You gave rent relief guidance previously. When you gross it up for tax, you kind of get to about $7 million to $11 million, and you're kind of sitting at $2.4 million on a like-for-like. Do you expect to get close to the bottom end of that range? Or is that range kind of being proven to be a little bit pessimistic at this point? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [12] -------------------------------------------------------------------------------- Well, you've got to say, we're looking really good. But it is early days. And the issue is going to be with the tenants falling over, and you're getting nothing for a long period. So the range still stands, but you've got to say, we're looking pretty good. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Yes. Did that range include any assumption on tenants falling over? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [14] -------------------------------------------------------------------------------- Yes. Yes. Yes. And it was based on just looking at tenants' businesses, the business risk. And then we overlaid that with some of the legal issues that we faced initially with exit issues as well. So we kind of -- there's a layer process we're going through in determining that range. And I think we still -- we are looking good is how I'd describe it. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [15] -------------------------------------------------------------------------------- I guess if we're looking at the higher-risk tenants we were going through, obviously, anything that was focused on international travel and tourism, we took a very close look at. Equally, obviously, CBD and retail, a lot of CBD and retail was driven from that international tourism. So we're pretty focused on what those looked like and their ability to ride through. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [16] -------------------------------------------------------------------------------- Then just one quick question on the deferrals. I mean you do have a portion of those. You might have told us before, but I possibly have missed it. So the percentage of that $2.8 million, that is actually, I guess, deferred. But what are the terms of receiving payment on that? Are you doing rent over 12-month, 24-month period? What's the kind of... -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [17] -------------------------------------------------------------------------------- Generally, it's quite short. And the vast majority of that, about 3/4 of it, is just one tenant. And they've been deferred for 1 month. So instead of paying at the start of the month, they're paying at the end of the month. So a large chunk of the deferral is very short term. But there are some that have been where we're saying you can pay it -- you don't pay anything for 2 months and then pay the shortfall over the following 12. So there's a few like that. But the vast majority of the deferrals number is one tenant. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [18] -------------------------------------------------------------------------------- Cool. And then maybe final 2 more, and then I'll give someone else a go. The development in Wellington for Stat, you're talking about them changing the space requirements based on social distancing. Are you able -- or have early conversations suggested that the existing development can house them? Or do they require space outside of that? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [19] -------------------------------------------------------------------------------- Look, at this stage, we're expecting that we can house them within the existing development. So it's a case of how we deal with that and how many people they have working from home. It's more of the way the space is fitted out that's changing. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Okay. Perfect. And then just -- I know it's early days because we've only been out of lockdown for a couple of days. But leasing discussions, if you've had any, I guess, post-lockdown versus kind of pre-lockdown? What's the general feel? How are people feeling about, I guess, where market rents were? And also any sort of incentives that people have been talking, if you have that color? I mean I appreciate it's only a week post-lockdown. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [21] -------------------------------------------------------------------------------- Yes. But obviously, we kept working on leasing on the way through. We did get some leases done on the way through, small ones. But the tenants, in general, are taking a wait-and-see approach. They've moved out of the [splashy] risk option that they were sitting in 2 or 3 weeks ago. And certainly, this week, tenants, in general, were a lot more positive than they were. They are cagey about what the future looks like. And so as I think I mentioned, that stay put option, we expect to see being more prevalent. There's about 15,000 square meters available for sublease in the Auckland CBD market. And that's just looking at what's B grade and above. I expect that, that will be fairly competitive. No pushback on rentals at all at this stage. No pushback at all. We would expect, though, over the next 12 months to see incentives creep up. But at this stage, no push at that level. So we're planning on incentives going up, but we haven't seen it yet. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Next question comes from Adam Lilley with Craigs Investment Partners. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [23] -------------------------------------------------------------------------------- Just a quick one for me. Just looking at debt refinancing and bank liquidity. You've added a couple of new facilities. But just in terms of appetite from the banks, kind of that being in the [problem as they're meant] to be supportive and they've done so. But looking forward, how are you kind of feeling about that pricing and support from your syndicate? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [24] -------------------------------------------------------------------------------- Yes. I think there's plenty of appetite out there. It's interesting, with this refinancing, we're looking at various tenants. I think with the 5-year, I don't think banks are that keen on leaning 5 years at the moment. And the pricing is quite steep. And it tails away back down to 2. The line is quite steep at the moment, I think. But there's plenty of appetite. Something like Argosy, our security, there's no issues. And we've got 5 banks in our syndicate, which is very helpful. So plenty of appetite. In terms of margins, I would say from September last year, things pushed out by about 40 points across the curve. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [25] -------------------------------------------------------------------------------- And do you expect that to be stabilized? Or is it kind of [for the rest there], do you think? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [26] -------------------------------------------------------------------------------- It's hard to say how things will go down the track. I think it could be there for a while. I mean the bond market is not so good at the moment. USPP is blown out. I think banks are probably the only [poor] call really for a while, especially if you're unrated. So yes, I suspect that the margins will be around that range for a while. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Okay. And just on Neilson Street. Do you have any updates on that project? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [28] -------------------------------------------------------------------------------- Yes. Look, with the Neilson Street project, obviously, we've still got tenants in place there. And we expect that their occupancy is likely to continue for a longer period, which probably suits us because we'd expect the development of the site to take a bit longer to get off the ground as well. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- So is it -- do you have -- are you having discussions with a particular interested tenant? Or are you still kind of seeing like a range of potential kind of tenants or occupants for that site? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [30] -------------------------------------------------------------------------------- We're still looking at a range on it, but the reality is that we've got -- we've been working with 2 of the existing tenants in the portfolio who had expansion aspirations. But as I say, probably a bit longer term now than it was. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next question comes from Nick Mar with Macquarie Group. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [32] -------------------------------------------------------------------------------- Sorry, just finalizing the rent relief stuff. In terms of what you said for April and May, have you essentially concluded negotiations for the nonpayments and everything else with [Willis Street]... -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [33] -------------------------------------------------------------------------------- No. We're about 2/3 -- or 2/3 of that number has been agreed. The balance has been provided based on initial discussions, the to-ing and fro-ing, but they haven't been finally agreed yet. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [34] -------------------------------------------------------------------------------- Okay. No, that's cool. Sorry, just to be clear, the 2/3 is within that $2.4 million. -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [35] -------------------------------------------------------------------------------- [We think we're done about]... -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [36] -------------------------------------------------------------------------------- Within that $2.4 million. Yes. Okay. No, that's cool. And then just kind of going on to distributable profit. Is it your intention to use the deposit as part of the distribution for FY '21? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [37] -------------------------------------------------------------------------------- That's a really good question. No. Basically, we said $0.0635. We think we're going to clear that without the deposit. But we're going to treat it as distributable income because we're going to be required to treat it as income anyway. And then you get into the issues of whether it's distributable or not. Well, it is in an ordinary course of business, and it's completely separate from the asset now. So we're going to treat it as distributable income. But that is really over and above our clearance of the dividend. So we think we're going to clear that $0.0635 per share without the deposit. We don't need that. But we are going to treat it as distributable income. So if you're forecasting, you should include it because it will be there. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [38] -------------------------------------------------------------------------------- Yes. Okay. No, that's cool. And then just on the development, could you just talk through where you're at on, I guess, the leasing on Stewart Dawsons, which is now wrapped into the kind of 8-14? And then obviously, the value on completion has gone up for that. Could you just talk through that and whether or not or how much the costs have changed so far? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [39] -------------------------------------------------------------------------------- Yes. I'll take those in order. With the retail stuff, we haven't got to conclude the deal. So the valuation is based on what they think we might be able to achieve. Leasing of that space post COVID-19 may take a little longer than we had expected. But we do have reasonably good inquiry that we're working through at the moment it just might take a bit longer to get there. So it's not a done deal by any stretch of the imagination. And we're still very much working through recasting what that is going to look like from a program and cost basis. And obviously, we've taken some fairly prudent views on it. But the value increase was driven by additional area that is being created in the building from the last valuation was the biggest change there. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [40] -------------------------------------------------------------------------------- Okay. So what happened to the international retailer who was very, very close to signing a lease with you on Stewart Dawsons? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [41] -------------------------------------------------------------------------------- They're still there. We're still talking. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [42] -------------------------------------------------------------------------------- Okay. And then -- sorry, just in terms of the cost to complete, the $48.2 million, can you tell me how much you spent to date, and therefore, what the total was versus the original budget? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [43] -------------------------------------------------------------------------------- Yes. We spent 20 -- the original budget was -- for the Willis Street project was $64.4 million. And we're still on track for that. To date, I don't have the to-date numbers here. Sorry, sorry, I don't have the... -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [44] -------------------------------------------------------------------------------- I will follow up later. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [45] -------------------------------------------------------------------------------- Yes, we'll come back to you on that. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Your next question comes from Matt Goodson with Salt Funds. -------------------------------------------------------------------------------- Matthew Goodson, Salt Funds Management Limited - MD & Portfolio Manager [47] -------------------------------------------------------------------------------- Just a question on your thinking around the gearing. Obviously, sitting at 38.8%. And property valuations are anyone's guess at the moment, as shown by the audit matter. And in the debt part of the capital stack, margins are blown out by 40 points. So if that was to happen to cap rates, it would obviously lead to a number in the 40s. So just how are you thinking about gearing levels? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [48] -------------------------------------------------------------------------------- Yes. Well, I think we do want to get it down there, actually. And the plan was to sell these assets we don't want. And that would reduce it by 5% if we were successful. Then you got insurance as well. And the DRP, we've resumed as well. And we've pushed out some of the capital projects. So if everything comes to fruition, we'll be well into the lower half of our gearing range. And so if we have some cap rate softening, like 100 points of softening would drop our asset values by about $270 million. So 15% revaluation drop, and that's pretty consistent with the GFC. And that would increase gearing by about 5.5%. So you'll sort of still be towards the top half of your range even with the $270 million blowout. But the key thing is to execute on what we plan to execute anyway, but just -- there's a bit more pressure now because the lifestyle center didn't sell. So yes, that's the plan. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Shane Solly with Harbour Asset Management. -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [50] -------------------------------------------------------------------------------- Just to go back to the dividend in terms of the $0.0635 you've guided to for FY '21. Can you just flesh out a little bit about what actually has to happen to deliver that $0.0635? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [51] -------------------------------------------------------------------------------- Yes, sure. No more lockdown. No more lockdown. That's right. I mean if we -- if our hit to the top line is in the range... -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [52] -------------------------------------------------------------------------------- The $7 million to $11 million range, is that what you're talking about? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [53] -------------------------------------------------------------------------------- We'll have no problem sitting at the bottom -- hitting the dividend from net distributable income. So our current dividend policy is that we pay at least the net attributable income, and that's consistent with prior year. But that will change in a few years' time when we move to this AFFO-based dividend policy. But at the moment, it's less than net distributable income. So we've got -- everything depends on the hit to the top line because we know we've got the depreciation in the bag. We know we got the interest in the bag. So what's the top line going to be? And as I said before, it looks pretty good actually from where we sit right now. Providing we don't go to lockdown again, providing we don't have massive tenant failures, we're looking pretty good. -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [54] -------------------------------------------------------------------------------- So just picking up in terms of tenant failures, what are you providing for? Are you making provision for any potential failures at this stage? Or can you... -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [55] -------------------------------------------------------------------------------- I can't tell you who they are. That will get us in a bit of trouble. Obviously, there's going to be pressure on hospitality tenants, retail tenants, tourism-related tenants and a number of others, actually. So what we've done is we've gone through tenant by tenant, we looked at their businesses and said, okay, well, it's just going to be -- it's potentially going to be a problem. So we've been quite conservative. And we think we've got sufficient provisioning in place. But we've definitely taken that into account in our numbers that we've provided. -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [56] -------------------------------------------------------------------------------- Okay. Can I just flip back to the discussion about asset sales? If you look at the various assets you've got on the market, the potential to realize them within the next 12 months, can you just give us a little bit of a guide as to what your feeling is there? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [57] -------------------------------------------------------------------------------- At the moment, inquiry levels are good. Feedback is positive. Obviously, there's a risk. But there's nothing that's looking like it's going to be a problem at this point. Of those 3 assets, I expect the 2 Wellington ones to go reasonably quickly. The lifestyle center may take a little longer. And of course, given that we've got the -- we had an unconditional contract and we've got 2 parties at the other end of that contract that are still on the hook, I have to make sure I go through due process, have to make sure it's contestable if there's any situation where I might want to go back and chase them for any loss. -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [58] -------------------------------------------------------------------------------- Right. Got you. Sorry, the decision on Carlton Gore Road, that's just a matter of time? Or can you just flesh out a little bit more as to when they come back or otherwise? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [59] -------------------------------------------------------------------------------- Okay. The 2 Carlton Gore Road ones, we're probably -- at this stage, we said, look, it's going to be another 12 months. With the Tonkin & Taylor building, that is currently planned to be an extension and upgrade. My feel is that it's more likely to just be an upgrade, but that's not what we've got locked at this point. So at this point, just pushing out for 12 months. The Vector scenario, they've signed a 3-year renewal of the existing lease to give a 3-year window to get that put together. The Tonkin & Taylor one, they are expecting that it's closer than that. But as I say, it may be less extensive than was originally planned. -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [60] -------------------------------------------------------------------------------- Great. Just last question. Just remind us, Dave, the potential -- the insurance amount that you are still seeking and what you... -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [61] -------------------------------------------------------------------------------- We can't -- we don't really want to talk about that on the call. That's sensitive -- sorry, Shane. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Your next question comes from Arie Dekker with Jarden. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [63] -------------------------------------------------------------------------------- Just 3 from me. First, just in terms of valuation. I think Matt mentioned the note in the audit report. I heard from elsewhere in the sector, including from the valuers, that some companies in New Zealand/Aus are getting more regular valuation updates in this environment, whether it's, I don't know, board or bank-led. Can you just sort of comment on whether you're going to be getting an update on valuation between now and September? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [64] -------------------------------------------------------------------------------- That's going to depend on what happens in the market. Obviously, if we think there's been a substantial move, we will. We kept the valuers on, so it's a watching break. At this stage, valuers are more optimistic today than they were when they finalized the valuations, but anything could happen around the corner. So it will depend on what we see in the market as to whether there's any need to do any additional ones before September. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [65] -------------------------------------------------------------------------------- Great. Just back to the abatement. So I guess just a couple of questions. Firstly, the $2.8 million that you have sort of concluded/provisioned in the 2 months to date, can you just split that between April and May? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [66] -------------------------------------------------------------------------------- Yes, roughly equal. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [67] -------------------------------------------------------------------------------- It's roughly half now. -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [68] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [69] -------------------------------------------------------------------------------- Roughly. -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [70] -------------------------------------------------------------------------------- Yes. 50-50. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [71] -------------------------------------------------------------------------------- Okay. And so as you head -- I mean obviously, you've got to finish the deals for May. But I mean you'd have a basis presumably on assuming that, that momentum should improve into June. Have you got any observations to make on that? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [72] -------------------------------------------------------------------------------- Yes. I mean there has been some deals done that move into June as well. And I'm happy to give you that number. It's about $750,000 for June. That's including the Albany Lifestyle Centre. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [73] -------------------------------------------------------------------------------- Yes. And does anything extend beyond that at this point? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [74] -------------------------------------------------------------------------------- No. Well, we've got provisioning beyond that, but now we haven't done any deals. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [75] -------------------------------------------------------------------------------- Yes. Okay. And then just in terms of -- I guess, again, just with reference to sort of April, May, the abatement provisioning and deals at $2.8 million, how does that compare to cash collection of rents over those 2 months? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [76] -------------------------------------------------------------------------------- Well, it's pretty much -- it's most of the shortfall. So the cash collection, including the Albany Lifestyle Centre, was 78%. And the rental abatement part of that is the majority of the difference. So the future payments -- well, payments we're expecting to collect is much, much smaller than the abatements number that we've given you. -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [77] -------------------------------------------------------------------------------- Yes. Yes. Okay. So yes, so they do line up. No, that's great. And then just a final one from me, just on OpEx. Anything sort of notable to point out in terms of FY '21 guidance on OpEx? -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [78] -------------------------------------------------------------------------------- We're going to pay more for insurance in Wellington. But -- no, look, there's -- it's pretty much as you'd expect, apart from rates and insurance, which is the biggest chunk of the OpEx is rates and insurance increases are sort of the big driver. -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [79] -------------------------------------------------------------------------------- Yes. We recover about 70% of our OpEx from tenants. Unfortunately, a lot of the leases in Wellington are gross. So if we get an insurance or rate increase, it's a hit to us. So we expect to see... -------------------------------------------------------------------------------- Arie Dekker, Jarden Limited, Research Division - Head of Research [80] -------------------------------------------------------------------------------- And sort of the admin expense is sort of in line? -------------------------------------------------------------------------------- David Fraser, Argosy Property Limited - CFO [81] -------------------------------------------------------------------------------- Yes. I think so. I mean it will probably be a little bit down than what we've previously budgeted because we haven't done any travel or entertained anyone. So I expect them to be a little bit less than what we've originally budgeted. -------------------------------------------------------------------------------- Peter Mence, Argosy Property Limited - CEO [82] -------------------------------------------------------------------------------- And I've discovered that doing team drinks on a Friday night by Zoom does wonders from a boost budget. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating, and you may now disconnect your lines.